Pepperdine University

FINC 655

Chapter 18

Multiple Choice Questions

1)You are bidding in a second-price auction for a painting that you value at $800. You estimate that other bidders are most likely to value the painting at between $200 and $600. Which of these is likely to be your best bid?

1. 1. $1,000 [you should never bid above your value as you might end up paying more than the painting is worth to you.]
   2. $800 [in a second-price auction, the optimal strategy is to bid exactly your value.]
   3. $600 [If you are wrong and some other bidder values the painting at $700, you would end up losing the auction even though you would have been willing to pay $700.]
   4. $400 [You are unlikely to win a t a price this low.]

2. Which of the following is true about different ways of conducting a private-value auction?
   1. A first-price auction is strategically equivalent to a second-price auction. [Bidding behavior is very different in a first-price auction, where you bid below your value, and a second-price auction, where you bid equal to your value.]
   2. A first-price auction is strategically equivalent to an English auction. [In an English auction, bidders are willing to bid up to their values, but first price auctions involve bid shading.]
   3. A second-price auction is strategically equivalent to an English auction. [in an English auction, bidders bid up to their value with the highest-value bidder winning at a price near the second-highest value.]
   4. None of the above [One of the above answers is correct.]

3. Suppose that five bidders with values of $500, $400, $300, $200, and $100 attend an oral auction. Which of these is closest to the winning price?
   1. $500 [You need at least two bidders actively competing to drive the price up.]
   2. $400 [as soon as the bidder with the value of $500 outbids the next highest bidder, the auction would end.]
   3. $300 [since multiple bidders value the item more than $300, they would continue to compete, driving the price higher.]
   4. $200 [since multiple bidders value the item more than $200, they would continue to compete, driving the price higher.]

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4. In the above auction, if the bidders with the first- and third-highest values ($500 and $300) collude, which of these is closest to the winning price?
   1. $500 [You need at least two bidders actively competing to drive the price up.]
   2. $400 [The second-highest value sets the price, so the collusion removing the third-highest value from active competition would not affect the price.]
   3. $300 [despite the collusion, multiple bidders value the item more than $300, they would continue to compete, driving the price higher.]
   4. $200 [despite the collusion, multiple bidders value the item more than $200, they would continue to compete, driving the price higher.]

5. In a common-value auction, you should
   1. bid more aggressively the more competitors you face. [The more competitors you face, the more you should be wary of winning as this implies that every other bidder believes the item to be worth less than you do.]
   2. bid less aggressively the more competitors you face. [The more bidders there are, the more winning is potentially “bad news.”]
   3. bid the same regardless of the number of competitors. [In common-value auctions, beating out competitors reveals that they all think that the object is worth less than your bid.]
   4. bid more aggressively when others have better information than you. [The winner’s curse is especially bad when rivals have better information than you do.]

6. If a seller is concerned about collusion among bidders, which of the following changes to the auction should the seller make?
   1. Hold frequent, small auctions instead of infrequent large auctions. [frequent auctions allow bidders to take turns whereas a single large auction provides a greater incentive for cartel members to cheat.]
   2. Conceal the amount of winning bids. [this makes it harder for the cartel to know if cheating occurred, which provides incentives for cartel members to cheat.]
   3. Publically announce the name of each auction’ s winner. [announcing the name of each winner allows the cartel to monitor cheating, thus helping the cartel.]
   4. Hold a second-price instead of a first price auction. [collusion is easier in second-price auctions.]

7. You’ re holding an auction to license a new technology that your company has developed. One of your assistants raises a concern that bidders’ fear of the winner’s

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curse may encourage them to shade their bids. How might you address this concern?

1. 1. Release your analyst’ s positive scenario for the technology’ s future profitability. [revealing information reduces the winner’s curse, but this is not the only correct answer]
   2. Release your analyst’ s negative scenario for the technology’ s future profitability. [revealing information reduces the winner’s curse, but this is not the only correct answer]
   3. Use an oral auction. [oral auctions reveal information about other bidders’ values.]
   4. All of the above [in common value auctions, the auctioneer should reveal as much information as possible, both good and bad, to bidders so that they do not fear the winner’s curse.]

8. Which of the following is true about the winner’s curse?
   1. The winner’s curse occurs primarily in private-value auctions. [each bidder knows his or her value in private value auctions, so there is no winner’s curse.]
   2. You successfully avoided the winner’ s curse if you made money in the auction. [this is merely good luck. Avoiding the winner’s curse implies making money on average, not just in a single auction.]
   3. The winner’ s curse means that you bid incorrectly. [the winner’s curse happens when bids do not account for the fact that only the highest (and most optimistic) bid wins, and that the most optimistic estimate is likely to be wrong.]
   4. The winner’ s curse means that you lost money in an auction. [this is merely bad luck and can happen even when you bid correctly.]

9. A bidder’ s value for a good may be low ($2), medium ($5), or high ($7). There is an equal number of potential bidders having each value. Suppose two bidders participate in a second-price auction. What is the best estimate of the expected revenue from the auction?
   1. $4.11 [draw a table of the nine possible outcomes. The second-highest value sets the price in each auction. For example, the price is $7 only 1/9 of the time.]
   2. $3.99 [draw a table of the nine possible outcomes. The second-highest value sets the price in each auction.]
   3. $3.56 [the price is $7 1/9 of the time, $5 3/9 of the time, and $2 5/9 of the time.]
   4. $5.00 [the price can be as high as $7 or as low as $2. Draw a table of the nine possible outcomes.]

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